AQA A-level Economics: Comparative advantage and benefits and costs of trade (7136) – Practice Questions

These are original questions written for Marlbridge, for revision and practice on this content. They are not reproduced past-paper questions, and they do not replicate the exam’s exact structure, question count or mark tariffs – examination boards hold copyright in their own papers. Use these alongside the official past papers from your board or school.

These questions cover comparative advantage, the gains from specialisation and trade, other benefits, costs of trade and changes in the UK pattern of trade, from section 4.2.6.2 (3.2.6.2 on the AQA website) of AQA A-level Economics (7136), specification version 1.3. Every country, firm and figure is invented and illustrative. Read the study guide and revision notes first. Course pages: AQA A-level Economics hub, checklist and free diagnostics. Show your working.

Questions

1. Distinguish between absolute advantage and comparative advantage. [3]

2. Countries G and H make only wheat and cloth. The hours of labour needed per unit are: G needs 3 for wheat and 9 for cloth; H needs 4 for wheat and 6 for cloth.

(a) Calculate each country’s opportunity cost of one unit of cloth, in wheat. [2] (b) State which country has the comparative advantage in each good. [2]

3. Using question 2, G and H agree to exchange one unit of cloth for two units of wheat. Show that both countries gain from this price. [3]

4. G has 3,600 labour hours and H has 4,800. Before trade, half of each country’s hours go to each good.

(a) Calculate world output of wheat and of cloth before trade. [2] (b) Calculate world output if each country specialises fully in the good in which it has the comparative advantage. [2] (c) At the price in question 3, H sells 300 units of cloth to G. Show that both countries consume more cloth than before trade, with no less wheat. [3]

5. Explain two assumptions of the model of comparative advantage and how each, if untrue, weakens the case for specialisation. [4]

6. A small ceramics firm has fixed costs of 90,000 a year and variable costs of 6 per unit. It sells 5,000 units a year at home. Access to export markets lets it sell 15,000 units.

(a) Calculate the percentage change in average cost. [3] (b) Explain why exporting reduces average cost, and give one reason why the gain might not last. [3]

7. Exports are 30% of Country M’s national income. Metal ore is 50% of its exports. The world price of the ore falls by 12%, and the volume sold does not change.

(a) Calculate the fall in national income as a percentage. [2] (b) Explain why this shows a cost of over-specialisation, and suggest one way a government could reduce it. [3]

8. In one year, imports cause 9,200 job losses in Country N, while export industries create 5,700 jobs. The labour force is 1,400,000.

(a) Calculate the net job loss and express it as a percentage of the labour force. [3] (b) Explain why unemployment among the displaced workers might last longer than the year. [3]

9. Countries S and T make steel and software. S needs 5 hours per unit of steel and 10 per unit of software. T needs 8 and 12.

(a) Identify which country has the comparative advantage in each good. [2] (b) After a training programme, S needs only 6 hours per unit of software. Show how the comparative advantage changes. [3] (c) Explain how changes like this help to account for changes in the UK pattern of trade. [3]

10. Explain two reasons why the pattern of UK trade with the rest of the world might change over time. [6]

11. “Free trade benefits every country and everyone within it.” Evaluate this view. [10]

Answers

1. Absolute advantage means a country is more productive: it uses fewer inputs, or gets more output from the same inputs [1]. Comparative advantage means a country sacrifices less of another good to make it, so its opportunity cost is smaller [1]. A country can have an absolute advantage in both goods but a comparative advantage in only one [1]. [3] Examiner insight: A definition that mentions only “better at” earns little for comparative advantage. Opportunity cost must be named.

2. (a) G: 9 ÷ 3 = 3 wheat [1]. H: 6 ÷ 4 = 1.5 wheat [1]. [2] (b) H has the lower opportunity cost of cloth (1.5 against 3), so H has the comparative advantage in cloth [1]. G’s opportunity cost of wheat is 3 ÷ 9 = 0.33 cloth, against H’s 4 ÷ 6 = 0.67, so G has it in wheat [1]. [2] Examiner insight: Always show the division. A correct country with no working may not show that you used opportunity cost.

3. For G, one cloth costs 3 wheat to make, but buying it costs 2 wheat, so G saves 1 wheat per cloth [1]. For H, making one cloth costs 1.5 wheat of lost output, but it receives 2 wheat, so H gains 0.5 wheat per cloth [1]. The price of 2 lies between 1.5 and 3, so both gain [1]. [3] Examiner insight: The point that the price must lie between the two opportunity costs is what completes this answer.

4. (a) G: 1,800 hours on wheat gives 1,800 ÷ 3 = 600 wheat; 1,800 hours on cloth gives 1,800 ÷ 9 = 200 cloth. H: 2,400 ÷ 4 = 600 wheat; 2,400 ÷ 6 = 400 cloth [1]. World: 1,200 wheat and 600 cloth [1]. [2] (b) G makes 3,600 ÷ 3 = 1,200 wheat; H makes 4,800 ÷ 6 = 800 cloth [1]. World output is 1,200 wheat and 800 cloth, so 200 more cloth and the same wheat [1]. [2] (c) G gets 300 cloth for 600 wheat, so G has 1,200 − 600 = 600 wheat and 300 cloth [1]. H has 800 − 300 = 500 cloth and 600 wheat [1]. Before trade G had 600 wheat and 200 cloth, and H had 600 wheat and 400 cloth, so each has 100 more cloth and the same wheat [1]. [3] Examiner insight: Compare each country with its own pre-trade position, not with the world total.

5. Constant opportunity costs [1]: if costs rise as output of one good grows, full specialisation is less beneficial and the gain is smaller [1]. Free movement of resources [1]: if workers cannot move to the growing industry, unemployment results and the gain is reduced or lost [1]. (Other valid assumptions, such as no transport costs, are also creditworthy.) [4] Examiner insight: Each assumption needs its own consequence. Two assumptions listed with one shared comment is a weaker answer.

6. (a) Total cost at 5,000 units is 90,000 + 6 × 5,000 = 120,000, so average cost is 24 [1]. At 15,000 units it is 90,000 + 6 × 15,000 = 180,000, so average cost is 12 [1]. Change = (12 − 24) ÷ 24 × 100 = −50% [1]. [3] (b) Fixed costs are spread over more units [1], and a larger scale may allow specialised machinery or bulk buying [1]. The gain might not last if export demand falls or rival firms respond with lower prices, so output drops back [1]. [3] Examiner insight: Say that fixed costs are spread, not just that costs are lower. The economies of scale idea must be explained.

7. (a) Loss = 0.30 × 0.50 × 12% [1] = 1.8% of national income [1]. [2] (b) Reliance on one export means a price change in one market has a large effect on total income [1]. The country has no other exports to offset the fall [1]. A government could encourage diversification, for example through investment in education or support for new industries [1]. [3] Examiner insight: Quote the figure from part (a) in part (b) to link the calculation to the argument.

8. (a) Net loss = 9,200 − 5,700 = 3,500 jobs [1]. 3,500 ÷ 1,400,000 [1] = 0.25% of the labour force [1]. [3] (b) The skills of workers who lost jobs may not match the new jobs [1]. They may live far from where the jobs are created, and moving is costly [1]. Retraining takes time, so unemployment persists, which is structural [1]. [3] Examiner insight: Use the word structural and say why. A general claim that “there are no jobs” gains little.

9. (a) S: software costs 10 ÷ 5 = 2 steel; T: 12 ÷ 8 = 1.5 steel [1]. T has the lower cost of software, so T has the comparative advantage in software and S in steel [1]. [2] (b) S’s new cost of software is 6 ÷ 5 = 1.2 steel [1], which is below T’s 1.5, so S now has the comparative advantage in software [1]. T’s cost of steel (8 ÷ 12 = 0.67 software) is now below S’s (5 ÷ 6 = 0.83), so T moves to steel [1]. [3] (c) Investment in skills and technology changes productivity and so opportunity costs [1]. When the UK, or its trading partners, improve in some industries, the goods that are traded change [1]. Imports and exports shift towards sectors where the UK now has the lower opportunity cost [1]. [3] Examiner insight: Calculate both countries’ new costs. The comparison between them is the evidence.

10. Reason 1, for example growth of emerging economies [1]: faster-growing countries become new markets for UK exports and new sources of imports [1], so more trade shifts towards them [1]. Reason 2, for example changing comparative advantage towards services [1]: investment in skills and technology lowers the UK’s opportunity cost of services relative to goods [1], so exports and imports shift towards services [1]. (Other valid reasons include exchange rates, trade agreements and relative costs.) [6] Examiner insight: Give each reason a developed chain. Two reasons named with one line each stay thin.

11. Gains: specialisation according to comparative advantage raises total output [1]. Larger markets allow economies of scale [1]. Competition lowers prices and improves efficiency [1]. Consumers gain choice [1]. Costs: structural unemployment where industries close [1]. Over-specialisation exposes a country to price shocks [1]. Gains and losses are spread unequally across groups and regions [1]. Evaluation: the gains depend on assumptions such as mobile resources and constant costs, which often fail [1]. Time matters, since costs arrive quickly while gains take longer [1]. Judgement: trade usually raises national income, but “everyone” is too strong, because some workers lose unless policies such as retraining reduce the harm [1]. [10] Examiner insight: Take a position on the quotation. A list of benefits and costs with no final judgement stays descriptive.

Where marks are usually lost

• Using hours per unit directly instead of dividing to get opportunity cost.
• Inverting the ratio and naming the wrong country.
• Giving a price outside the range between the two opportunity costs.
• Comparing a country’s post-trade position with the world total.
• Listing benefits or costs with no chain of reasoning.
• Not using the data in the question.
• Forgetting to say who bears a cost.
• Concluding without a judgement.

Next steps

• Revision notes
• Study guide
• AQA A-level Economics hub and checklist
• All free 10-minute diagnostics
• Book a free trial class: /trial/

Official syllabus

AQA Advanced Level GCE in Economics (7136), specification version 1.3, 29 June 2022, published by AQA: section 4.2.6.2 Trade (first part), within The international economy.